Risk management key to FX trading through market volatility

Traders and investors have experienced unprecedented market volatility in recent weeks, with few expecting it to abate any time soon.

The impact of the FED rate rise, concerns over the Chinese economy as we welcome in the year of the Monkey, and fears of another global recession, have all played a role.

Another issue affecting the UK and European markets is the upcoming referendum to decide whether the UK will stay in the European Union. The vote will take place on June 23rd this year, and there is already intense speculation that the recent fall in the pound is partly attributable to uncertainty over the referendum result.

As concern grows over how a vote could impact on businesses, even the prospect of a vote is affecting business sentiment. This has the potential to undermine the UK’s recent economic recovery.

So with an eye on the strength of the pound, the fallout of any alteration to the UK’s relationship with the EU, and other major macroeconomic events, our elite FX traders said that a key element of every successful trading strategy was to focus on discipline, deliberations and purpose.

Their overwhelming advice for trading throughout 2016 was to keep an indelible focus on risk management, mind currency leverage and plan for global events instead of “big wins”. Here are their top tips for staying ahead through market volatility and making consistent profits with the right strategy:

Remain disciplined

Financial markets can feel like a roller coaster at times. According to top traders, the key to avoiding trade-induced nausea is to be disciplined. This means having the discipline to stick with pre-determined trade sizes, entry points and exit points, even if the markets are taking your gut on a wild ride.

Our elite traders reported that their positive track records come not from big wins, but by sharpening and executing strategies in a consistent fashion. Their focus is on taking more profit from the market than what they give away over the long run, rather than concentrating on specific wins or losses from individual outcomes over the short term.

Putting a strategy in place that is balanced and in line with your preferred level of risk will help minimize the fear and stress that can often paralyze new traders. This means putting up the right amount of capital which allows you to make a worthwhile profit without risking too much on a loss. Stop losses can help in this regard – they reduce stress because you can gauge the potential loss of a trade.

Be careful about excessive leverage

With great power comes great responsibility; and elite FX traders know that this adage rings especially true with leverage.

Leverage can build profits, but with the wrong approach it can also destroy a trader’s work. Leverage should therefore be handled with care and deployed only in the situations that call for it. Just because you have the ability to unsheathe maximum leverage, doesn’t mean that you should every time. In fact, many top traders report that they seldom use the full amount at their disposal.

Above all, traders want to decrease the likelihood of a margin closeout, where losses hit a threshold that triggers the closeout of all positions. Along with minimizing account leverage to a level that best suits experience and risk appetite, limiting the number of open positions and using smaller position sizes is also key.

Focus on effective cash management, rather than the ‘big win’

Being disciplined isn’t just about minimizing loss, it’s about sticking to your game plan when you’re winning. Many of the traders surveyed said that they focus just as much on taking returns off the table as they do with risk.

A typical component of success is less about knowing when to call the top of the market, and more about profit taking as dictated by the strategy. A succession of upsides can tempt traders to leave money on the table for longer than their strategy prescribes, which may expose them to sudden downsides.

Good cash management also extends to trade sizes, with many elite traders starting relatively small and increasing trade sizes only as they grow their earnings.

Have a balanced, multi-faceted trading plan

Beyond stop losses, trade sizes and leverage, elite traders use an array of information to guide their strategies. While it’s known that advanced retail FX traders utilize charts religiously, many of the traders surveyed said that they also keep up-to-date on macro-economic events.

Doing so is key because trading opportunities are largely driven by changes or perceived changes in macro-economic relationships. That’s why our elite traders run off a multi-faceted trading plan, built on multiple sources of information so the risk and opportunities are understood in equal measure and are as clear as possible.